Getting started in paper assets is very easy. Anyone today can go online and buy or sell a share of stock. Deciding what and when to buy and sell is where it gets tricky.
Stocks are only one form of hundreds of the paper assets available today. There is a term you may have heard of: derivatives. It’s a fancy word that is used often. What does it mean?
The root word of derivative is derive, which means, “to come from something.” Think of orange juice:
- You slice an orange.
- You squeeze the juice out of the orange into a glass.
- The juice is a derivative of the orange.
A share of stock is a derivative of the company that issues it. A stock option, such as a put or a call, is a derivative of a stock.
A quick word on brokers
It’s obvious that I am a huge proponent of women getting financially educated, myself included. When I first delved into paper assets years ago, I knew nothing about the stock market.
So, I did what, at the time, seemed like the smart thing to do. I found a stockbroker. His name was Mark. I told Mark, “I have a little money to invest in stocks. What do you recommend?”
He said, “You can’t go wrong with Coca-Cola. It’s been on the upswing for the past three months.”
In the past, stock tips were often shared via brother-in-laws, in the elevator or next to the water cooler. Person “A” would share their amazing stock tip and how they have been killing it with this particular investment or that they have heard that this stock is about to take off. Person “B” would anxiously listen and then perhaps go out and have their broker buy shares in that company.
While this level of amateur advice might be laughed at by some today, many of those same people get excited when they see a stock tip on the Internet. Chat rooms, Twitter and blogs have become today’s new water cooler; and somehow, because individuals see stock tips on the Internet, they give the tip a higher level of credibility. They might have rolled their eyes at their brother-in-law; but if they stumbled across their brother-in-law’s blog, they’d promptly invest in his suggestions!
Why People are Interested in Stock Tips
Most people have very little expertise in the stock market and investments, yet most people are interested in making money. Thus, people are always looking for someone who can bridge the gap between their lack of knowledge and their desire to make more money.
Historically, the way most people addressed this gap was to hire/pay a professional to invest their money for them. Today, more and more people are becoming disillusioned with the professional investing community and are looking to make their own investment decisions.
Robert walked into the house one day to find me yelling at the television.
“Wake up! Don’t be a fool! Stop acting like a little girl! Grow up!” I yelled.
“What’s going on?” Robert asked, laughing.
“It drives me crazy to see women do such stupid things when it comes to money! This woman is asking a total stranger, some financial planner on TV promoting himself, what to do with a few thousand dollars she has saved up,” I said. “He’s giving her bad advice, and she just says, ‘Oh, thank you so much. That’s just what I’ll do.’ How stupid is that? She’s a good example of why women are often stereotyped when it comes to money and investing.”
“She certainly struck a chord in you,” Robert said, grinning. “Maybe women aren’t even aware of what they’re doing. Here’s your chance to point it out to them.”
Many people think that investing is risky. When I was growing up, my poor dad believed this. Because he valued comfort and security, he felt that smart people got a good job and saved their money.
My rich dad, on the other hand, felt that my poor dad’s plan was risky. He aspired to own his own businesses and to invest his money rather than save it.
As a young man, I had to decide for myself who was correct, my poor dad or my rich dad. It was not an easy decision. Both men were confident in their opinions, but after much questioning and study—as well as an understanding of what I wanted in life—it was clear that my rich dad’s path was the path for me.
Along the way, I learned 3 key reasons why my poor dad really thought investing was risky—and why it was, for him and others like him.
1. Lack of training
Most people go to school to be trained on how to be an employee or self-employed. School teaches us things like reading, writing, and arithmetic, all good things and useful for the work world. It teaches us how to execute on orders from our superiors and be where we’re told to be at the right time – the mindset of an employee.
School doesn’t teach how money works, or how to have it work for you. It doesn’t teach you the skills necessary to become a business owner or an investor. Those are skills that you must seek out and teach yourself.
As a result, most people simply lack the training necessary to know how to invest in a way that isn’t risky. And without training and knowledge, investing is risky.
2. Lack of control More »
I met a new Rich Dad Education student at a recent Symposium. He was from California and had enrolled in our Elite Training Program a few weeks earlier. He was excited to take his first training, the Foreclosure class; but he was even more excited to begin investing in real estate.
He told me that he wanted to “do a foreclosure deal.” I informed him that in the Foreclosure class, he would learn some great acquisition strategies. I then asked him what exit strategy he wanted to use on his first deal. He was puzzled by my question. He is not the first student I have met over the years who failed to initially think about both sides of the formula. You need both “acquisition strategies” and “exit strategies.” The more of both you have, the better equipped you will be to handle (and profit from) future transformations in your local real estate market.
There are a lot of great acquisition strategies. One way many newbies start is with simple marketing that declares, “I Buy Homes, Ca$h or Terms.” When we buy with cash, whether it is our cash or OPM (other people’s money), we need a significant discount. The Wholesale Elite Training covers cash strategies in great detail. Terms purchases can involve a multitude of contract engineering techniques. These strategies are covered in two different Elite Trainings: Lease Options and Creative Real Estate Financing. What is neat about these three “cash and terms” trainings is they also teach valuable exit strategies.
With exit strategies, you convert your acquisition into cash, cash flow or a combination of cash and cash flow. Investors who want the benefit of passive income from holding rental property will find great value by taking the Property Management & Cash Flow Elite Trainings. Investors who want to convert their acquisition into immediate cash have two popular exit strategies: sell it wholesale or sell it retail. Creating a combination of cash and cash flow can be a bit more complicated, but all the details are covered in the Lease Options and Creative Financing trainings mentioned above. If you took one of these classes before this year, it may behoove you to retake it soon, since there have been some recent changes in federal law that affect seller financing transactions.
When I’m investing, my first and primary focus is cash flow. Cash flow is simply the income you receive from an asset each month, quarter, or year, minus the expenses required to maintain the asset.
For instance, if you invest $25,000 in a new gourmet food business and receive $400 a month in net income, that $400 is your cash flow. If you pay $20,000 down to purchase a $100,000 rental property, and, after paying the mortgage and operating expenses, collect $100 per month in rental income, that $100 is cash flow.
It’s money that flows right into your pocket.
Why is cash flow important?
Financial independence means one thing to me: FREEDOM.
When I’m financially independent, I’m free to do what I want, whether it’s to have a life of leisure or pursue a new business adventure. I am free to be with people I choose. I’m free to set the schedule I want. My time is truly my time.
Make a choice
Freedom means I have more choices. And I like choices.
If you had a choice between flying coach or flying first class, which would you choose? Most people don’t have that choice. They fly coach because that’s all they can afford.
If you had a choice between eating at a taco stand or a five-star restaurant, which would you choose? It depends on what you’re in the mood for. (Personally, I’d probably choose the taco stand!).
The point is that with financial freedom, you have the choice!
Cash flow = freedom
As long as I have to work, I’m not free. I may choose to work, but that is a very different thing from having to work. If I have to do something every day to generate money to live on, then I’m not free.
Positive cash flow is money that comes in every month whether I work or not. My assets throw off positive cash flow every month, whether I’m working or not. And that money goes straight into my pocket.
My number-one goal is to get more cash flow coming in than is going out for living expenses. When I do that, I’m financially free. My assets work for me, instead of me working for money.